3.4.7 ‘Multiple entry consolidated’ (MEC) groups
5. Unresolved issues
5.1.
Pre-implementation effects of tax
consolidation
5.1.1.
How should tax-consolidation be treated prior to its formal
implementation?
Interpretation 1052 does not deal with the issue of how to treat the pre-implementation effects of tax consolidation on an entity, i.e. where tax consolidation legislation has been enacted or
substantively enacted but the entity has not yet formally elected to implement tax consolidation (see UIG 1052.27).
There are two main views as to how this issue should be treated under A-IFRS. Each of these views is outlined below.
) Most entities would have entered tax consolidation by their date of transition to A-IFRS, lessening the impact of this issue for many entities. However, this issue still remains relevant in relation to restated business combinations prior to an entity’s date of transition, as the difference in views may mean that the critical date is ‘implementation date’ rather than ‘substantive enactment’ date of the tax consolidation legislation (21 October 2002). A related issue also arises in relation to acquisitions of entities that occur in stages, whereby a business combination occurs when control is achieved, but the entity only enters the tax-consolidated group once 100% ownership is achieved (see section 3.2.5.3).
5.1.1.1.‘Change in tax status’ view
This view considers the implementation of tax consolidation to be a voluntary change in tax status which should only be recognised in the financial statements of the financial reporting period for which a definite decision to implement has been made.
This view is supported by Interpretation 125 Income Taxes – Changes in the Tax Status of an Entity or its
Shareholders, which deals with accounting for the impacts of a change in tax status but does not
explicitly deal with which accounting period a change in tax status should be recognised. Interpretation 125 alludes to the fact that an ‘event’, e.g. a public listing or move to another
country, gives rise to the change in tax status (UIG 125.1). Furthermore, it notes that the change in tax status may have an ‘immediate’ effect on current tax assets and liabilities, along with deferred tax assets and liabilities (UIG 125.2).
This commentary therefore implies that the impact of a change in tax status is recognised when the event that gives rise to the change in status occurs. This appears to be particularly the case where the change in tax status is voluntary – such as a public listing or changing domicile.
Under this view, the voluntary election to tax consolidate is in substance no different from a change in tax status that results from a public listing or change in domicile. Each of these events are then not recognised until the event that gives rise to the change in tax status occurs, i.e. the public listing
Pre-implementation effects of tax consolidation
5.1.1.2.The ‘change in accounting estimate’ view
AASB 112 requires that the measurement of deferred tax liabilities and assets reflect the tax consequences that would follow from the manner in which the entity expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities (AASB 112.51).
Under this view, the effects of the anticipated implementation of tax consolidation should be recognised in the financial statements, even though the implementation date may be some time after reporting date.
Applying this view would require an analysis of the likely impacts of tax consolidation on the entity’s tax bases at some point in the future, and take these into account in the first period (after substantive enactment of the tax consolidation legislation on 21 October 2002) in which it becomes likely that tax consolidation will be implemented.
This view would effectively mean that the full impacts of tax consolidation will need to be
recognised in an entity’s opening A-IFRS balance at the date of transition to A-IFRS, unless it can be clearly illustrated a decision not to implement had been made at that date (1 July 2004 for June balancing entities). This is a substantially different treatment than under UIG 39/UIG 52 where the superseded AASB 1020 was being applied, as the full effects of tax consolidation were only recognised once a decision to implement was made.
Recent developments at the IASB level
The IASB is considering the impacts of changes in tax status as part of its joint convergence project with the FASB on income taxes.
Considering differences between IAS 12 and SFAS 109, the IASB decided (at its meeting held in March 2005) the following with respect to the effect of a change in an entity’s tax status on current and deferred taxes:
• the scope of the guidance in SIC-25 would not be narrowed to address only a change in an entity’s tax status from taxable to non-taxable and vice versa
• the tax consequences addressed by SIC-25 would not be narrowed to address only deferred tax consequences, but would continue to cover both current and deferred tax consequences.
• the staff would ask the FASB to consider extending the scope of SFAS 109 to address both current and deferred tax consequences of any change in tax status of an entity or its shareholders that affects the tax assets and liabilities of an entity, and thus converge with SIC-25 in that respect.
• the following guidance, included in SFAS 109, would be added to SIC-25: The effect of (a) an election for a voluntary change in tax status is recognised on the approval date or on the filing date if approval is not necessary and (b) a change in tax status that results from a change in tax law is recognised on the date that the tax law is exacted or substantively enacted.
The effect of these decisions is that tax consolidation would most likely be considered a ‘voluntary change in tax status’ that is only recognised ‘on the approval date or on the filing date if approval is not necessary’. This could resolve this issue in the longer term on the reissue of IAS 12/AASB 112.
However, in the meantime, this IASB decision may also favour treating tax consolidation as a voluntary change in tax status.
5.2.
Tax consolidation and investments in
subsidiaries
5.2.1.
General requirements in relation to deferred taxes and investments
The following flowchart provides an overview of the application of the recognition exception for investments in subsidiaries, branches and associates and interests in joint ventures under AASB 112. References are to paragraphs of AASB 112.
Is the temporary difference taxable or
deductible?
Is it probable that the temporary difference will reverse in the foreseeable
future? Is the parent, investor or
venturer able to control the timing of the reversal of the
temporary difference?
Is it probable that taxable profit will be available against which the temporary
difference can be utilised? Is it probable that the
temporary difference will not reverse in the foreseeable future?
RECOGNISE a deferred tax asset to the extent that it
is probable in accordance with the two prior tests (¶44)
DISCLOSE the unrecognised temporary
differences (¶81(e), 81(f))
RECOGNISE a deferred tax liability to the extent that the taxable temporary
difference is expected to reverse (¶39)
Do NOT recognise a deferred tax liability for any
remaining taxable temporary differences
Do NOT recognise a deferred tax asset for any
remaining deductible temporary differences Yes No Yes No Yes Yes No No Taxable Deductible RECOGNISE a deferred tax liability for the full amount of the taxable temporary difference (¶39)
Tax consolidation and investments in subsidiaries